FEATURED COMPANIES

Foreign and domestic drugmakers in Ukraine will see their operating margins squeezed from 2013 as the Ministry of Health introduces more severe limits on mark-ups. Combined with the likely devaluation of the hryvnia, these factors represent a very large business risk for international drugmakers operating in the country. While Ukraine remains one of Central and Eastern Europe (CEE)'s more promising pharmaceutical markets given its favourable demographics and disease profile, its chronic lack of economic and political stability remains a critical impediment to fulfilling this potential.

Headline Expenditure Projections

- Pharmaceuticals: UAH26.75bn (US$3.35bn) in 2011 to UAH30.79bn (US$3.75bn) in 2012;+15.1% in local currency terms and +12.1% in US dollar terms. Forecast unchanged from Q412.

- Healthcare: UAH96.98bn (US$12.14bn) in 2011 to UAH109.66bn (US$13.37bn) in 2012;+13.1% in local currency terms and +10.1% in US dollar terms. Forecast slightly up from Q412 on account of new historical figures.

- Medical devices: UAH6.38bn (US$799mn) in 2011 to UAH7.39bn (US$901mn) in 2012;+15.8% in local currency terms and +12.8% in US dollar
terms. Forecast slightly up from Q412 on account of new historical figures.

Risk/Reward Ratings:

In BMI's latest Risk/Reward Ratings Ratings (RRRs) for the 20 markets of Central and Eastern Europe (CEE), Ukraine receives a composite pharmaceutical rating of 49.4, which is an improvement on 47.9 in Q412. The new score - propped up by the now more favourable industry rewards score - ranks Ukraine 12th overall, up from 14th previously. However, risks to our forecasts expressed in US dollars will continue to be posed by the weakness of local currency.

Key Trends & Developments

- In August 2012, a new laboratory for quality control of drugs was inaugurated in the Rivne region of Ukraine. The laboratory will enable technicians to determine the quality of medicines on eleven parameters, compared with four elements earlier. The laboratory spent UAH6.8mn(US$0.82mn) from the state budget to upgrade its processes, which are now automated and will provide more precise and operational research results.

- In November 2012, the Volyn Regional State Administration in Ukraine instructed retailers Volynfarm, Volynfarmpostach and Salve to lower the prices of their drugs. The move is aimed at offering affordable medicine access to socially vulnerable groups in the country.

Volynfarm has been asked to cut the cost of 100 essential medicines by 10%, while Volynfarmpostach has been instructed to give a discount of 5-10% on 88 medicines. The administration ordered Salve to discount 104 medicines.

- Changes in maximum mark-ups for selling medicinal products and medical devices will be implemented from January 1 2013. The new mark-up levels will be applicable to products included in the National List of Medicinal Products and Medical Devices as well as to mandatory minimum assortment for pharmacies. The cabinet restrictions specify a 10% purchase price for wholesale mark-ups, with the maximum level depending on the level of purchase price for retail mark-ups. The changes include expansion of the mandatory minimum assortment of medicinal products and medical devices.

- In October 2012, Horizon Capital, a Ukrainian private equity fund, and FMO, a Dutch development investment bank, acquired a stake in Biofarma, a leading Ukrainian pharmaceutical manufacturer. In exchange for equity, Horizon and FMO will inject capital into Biofarma for constructing a modern plant in the capital Kyiv. Biofarma is a leading Ukrainian pharmaceutical manufacturer of plasma protein products, organic drugs and recombinant proteins. The company is also unique among domestic manufacturers in that it is good manufacturing practice (GMP)-certified for the production of plasma protein products. The drugmaker has hired Linde, a German engineering company with expertise in pharmaceutical production, to construct the facility and bring its manufacturing practices in line with leading GMP standards and Western regulations.

BMI Economic View:

Recent economic indicator readings suggest a more aggressive economic slowdown earlier than we anticipated. We have long-held a negative outlook for Ukrainian economic activity, on our negative outlook for global metallurgical markets, a hryvnia devaluation and a weaker external demand. As a result, we have downgraded our real GDP growth forecasts to -0.1% and 1.0% in 2012 and 2013 respectively, from a previous forecast of 2.0% and 0.9%.

BMI Political View:

In line with our expectations, the ruling Party of Regions has held onto its majority following the parliamentary elections on October 28 2012, providing President Viktor Yanukovych with a pro-presidential majority. With the Party of Region's majority now secured and the next election three years away, the government will turn its long overdue focus to economic policy and reform, including as yet unfulfilled promises to the International Monetary Fund (IMF). This could potentially lead to an unfreezing of Ukraine's US$16.4bn Stand-By Arrangement (SBA) with the Fund, which would provide a boon to domestic economic stability, as well as reducing default risks and lowering international borrowing costs. Energy policy and currency stability will present major-near term obstacles to economic growth and the government will have to undertake difficult decisions to avoid a full-blown crisis.
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